Lack of proper regulatory framework, pro-active legislation and poor supervision are some of the main factors that can be blamed for the failure of subsidiaries of CL Financial (CLF). These views were expressed by Dr Lester Henry, lecturer at the University of the West Indies (UWI), Department of Economics, and supported by other financial experts at Fourth Biennial International Conference on Business, Banking and Finance, at the Hilton Trinidad hotel, St Ann's, during June 22-24. The UWI-hosted forum was titled, Dealing with Distressed Financial Institutions.
The financial experts said if the required regulatory systems and proper supervision were in place, these mechanisms would have been able to provide some measure of protection to policeholders and investors in CLF companies: Colonial Life Insurance Company Ltd (Clico), Clico Investment Bank, British American Insurance Company Ltd (Baico) and Caribbean Money Market Brokers Ltd (CMMB).
REGULATING INSTITUTIONS
Henry said much attention has been paid to regulated financial institutions, such as banks, and not on the non-bank financial institutions. He said this is problematic as the insurance sector grew over the last 35 years in the absence of an appropriate legislative framework. Consequently, the Central Bank has been stymied by the inevitable challenge of change and by inadequacies in the legislative framework, which do not give the bank the authority to demand changes. In addition, he said, regulation of the region's financial sector may have been slackened. "There has been a lack of supervision and most of these issues and problems stemmed from these non-bank financial institutions," he said.
Henry said the lack of supervision gave CLF an opportunity to grow to an extent whereby it felt it was "too big to fail."
Drawing on an example, Henry quoted regional economist Prof Compton Bourne, stating that CLF could not meet its statutory liabilities for years and nothing was done about it. Henry said a number of weaknesses were missed in the operations of the over-leveraged CLF, leading to the collapse. Henry, who agreed with the recommendation of Norman Girvan, professor emeritus at the UWI, that the Government needs to equip itself in a timely manner with the necessary legal tools and supervisory instruments to effect adequate regulation of financial entities in the public's interest. He said greater supervision is needed by the Central Bank to ensure that no other company grows to the point that it is considered too big to fail.
Corrective measures
Underscoring the Henry's views, Dr Ramon Guzman, financial market lead specialist of the Inter-American Development Bank, said these trends must be corrected because it is extremely unsettling when taxpayers have to take the fall. He said effective supervision based on sound prudential regulation could help adopt corrective measures and prevent crisis. Guzman said early warning systems, availability of information and on-site supervision, are some of the other factors could help in going forward. Arnold McIntyre, programme co-ordinator of the Caribbean Regional Technical Assistance Centre, called for a regional solution. "Clico is not a Trinidad problem, it's a regional problem. Therefore, we must think beyond Trinidad. We have to look at a regional solution," he said.
Afra Raymond, managing director of Raymond and Pierre Ltd, a chartered valuation surveying company, said, while all of these recommendations are good, it is more important that people responsible for this great financial fiasco be held accountable. Part of the solution in going forward is that people must be punished, Raymond said. "No set of regulation would solve these problems unless there are consequences for these actions," he said. "There are no consequences to the CLF fallout, as none of these people are going to prison," Raymond said. He said there is a culture where fraud and robbery are committed and no one goes to prison. He questioned the kind of behaviour that was being promoted if no one is held accountable and questioned how can better standards be established.
Raymond, who described the CLF fallout as the largest destruction of capital in the world's history, said the people should desist from comparing it to the Wall Street crisis in the United States. He said this was a crisis of our own making and the size of the situation is much bigger. He said the Wall Street crisis affected about one per cent of the American gross domestic product (GDP), while the International Monetary Fund (IMF) official March report stated that the CLF fallout affected 13 per cent of T&T's GDP.
"Then how are we going to manage? We need a fresh look at the situation," Raymond said.
Impact:
• Clico owns 57 per cent of the shares of Barbados National Bank.
• Baico is "financially insolvent" and the policyholders and investors would only recover ten cents on the dollar of their investments if the company is to be liquidated.
• Baico's total liabilities in the Eastern Caribbean amount to EC$1,050 million, of which EC$842 million is in the form of annuities or investment contracts.
• Total "deficiency" is approximated to be EC$775million, but this could be closer to EC$945million, since investors may only be able to recover ten per cent of their money if the company is liquidated.
• To highlight the true effect of this, EC$945million is just under 10 per cent of the combined GDP of the seven OECS countries that are members of Caricom.
• This amounts to EC$1,565 for every man, woman and child in these seven OECS countries.
Dr Lester Henry